US debt markets prepare for rise in foreign investors 

A disrupted commercial real estate capital markets means investment opportunities are more nuanced than there were in past cycles. 

The US commercial real estate market could see an influx of foreign investors focusing on the debt markets, with an expectation family office and institutions from around the world could allocate capital toward preferred equity, mezzanine debt and other financing opportunities. 

While much of this evidence is anecdotal, lenders, investors and advisers are reporting an increase in conversations in foreign investors who are seeking a relatively politically stable jurisdiction – who are also willing to be more flexible in where they participate in the capital stack. 

“Non-US institutional investors have continued to view the US property markets as a solid component of a portfolio, regardless of where we might be in the economic cycle,” said Gunnar Branson, chief executive of the Association of Foreign Investors in Real Estate, a Chicago-based trade group.  

The US commercial real estate market has historically had a healthy inflow of capital from foreign investors, but elevated inflation, rising interest rates and geopolitical strains have meant this has declined since the start of the covid-19 pandemic. Still, as in any period of distress, many investors are hoping to find discounts, Branson said. 

On the ground 

Foreign capital invested in the US totaled $34.8 billion last year, according to a late August report from New York-based advisory Newmark. The firm also found that foreign investment in the US declined by 18 percent year-over-year through the end of June and tracked a shift away from office investments and into multifamily and industrial properties. 

Anecdotal evidence around debt and equity deals done this year show a shift toward these sectors, including Mexico’s Banco Inbursa origination of a $220 million loan for Silverstein Properties and MetroLoft Group for the conversation of New York’s 55 Broadway into apartments and Ponte Gadea’s acquisition of Chicago’s 727 Madison Street, a West Loop apartment tower for $232 million.  

There have also been more low-profile conversations with foreign investors from around the world who want to set up short- or longer-term ventures with established US platforms, said Chinmay Bhatt, a senior managing director and founding member of Berkadia’s JV Equity & Structured Capital Group. 

Berkadia, a New York-based advisory, is seeing more interest from investors who want to tour properties and meet with sponsors about longer-term partnerships, Bhatt said. 

This activity jibes with an August report from New York-based consultancy Hodes Weill, which found institutional investor allocations toward commercial real estate are rising. The report, which surveyed 173 global institutions, found that 28 percent of institutional were on track to increase their allocations this year while nine percent would lower their allocations.

Matthew Dzbanek, senior director of capital services at New York-based Ariel Property Advisors reckons the lower leverage, higher-for-longer interest rate environment might just be a reason for this investor group to look to US commercial real estate as an attractive opportunity relative to their respective domestic investment options.

“There is a lot of foreign capital coming in and buying high-profile assets because they’re paying a bit more on less than the cap rate, but they’re getting a really attractive price per foot,” he said. 

Finding opportunity

One of the difficult parts of today’s market is finding opportunity at a time when the market continues to be disrupted, Bhatt said. 

“The reality is that people are expecting this higher rate environment will last for a longer period. You’re dealing with a market where you don’t have the lower-cost lending that was available even fifteen to eighteen months ago. What we are seeing is that there are deals that still work, even with the current lending environment,” Bhatt said. 

The firm is seeing deals which require new debt, both for development or existing deals. “Some of those still work and people are saying, ‘Let’s work within this reality to find the deals that make sense. The notion that nothing makes sense is false because we’re able to find those deals, even if it just a few in a hundred,” Bhatt said. 

Branson notes distress in the office sector continues to impact the rest of the market.  

“The search [for opportunity] however, is somewhat complicated by the changing dynamics and potentially accelerated obsolescence in the office market. The level of demand for office in many CBDs is not yet clear, and the way tenants use office space is changing fast.  Investors are proceeding carefully,” Branson said. 

He added: “Over the last several years, even before covid, investors have been changing the balance of their investments from an office-centric portfolio to a mix of office, multifamily, and industrial. The demand for housing is very strong, and most investors are interested in expanding their residential portfolios if and where they can,” Branson added. 

Additionally, a gap between sponsor equity and senior debt has also meant more potential investors are looking at debt strategies or considering debt as part of an overall strategy. 

“Many investors see a high demand for new debt capital and in many cases, it may be a good way to participate in high quality deals,” Branson said.  

Looking ahead

Shlomi Ronen, managing principal and founder of Los Angeles-based real estate merchant bank Dekel Capital, agrees that today’s environment presents a unique opportunity for foreign investors looking for institutional assets – especially those with a long-term focus.  

“A lot of high-net-worth family office investors, that have not really been active for the last five years, are now seeing a very significant buying opportunity,” Ronen said. 

Noam Franklin, a managing director and head of Eastern US for Berkadia’s JV Equity & Structured Capital Group, said the firm is starting to see an uptick in deal activity. 

 “We are talking non-stop to owner-operators and developers in the housing space and on the other side, we are talking to as many equity sources as we can,” Franklin said. “We are starting to see a lot more activity in the last few weeks. We have been in a more joyous mood – deals are starting to make sense.”